Vestis Corporation

Welcome to the Vestas Corporation Fiscal Third Quarter 2026 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. To enable others to hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Stephan Neely with Balaam Advisors.

Thank you, operator, and thank you all for joining us on the call this morning. Leading the call with me today is Jim Barber, President and Chief Executive Officer, and Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam will provide prepared remarks and then we will open the line to questions. Before I turn the call over to Jim, I would want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for such forward-looking statements. Actual results may differ significantly from those projected in today's forward-looking statement due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest gap financial measure is included in our quarterly earnings press release and corresponding supplemental materials, which are available at ir.sestis.com. With that, I would like to turn the call over to Jim.

Thank you, Stefan, and good morning, everyone. We appreciate you joining us. Our third quarter results highlight consistent execution of our transformation plan. For the second quarter in a row, we grew adjusted EBITDA year-over-year and improved operating leverage, and we did it by running the same disciplined playbook across the business. Third quarter adjusted EBITDA was approximately $81 million, an increase of roughly 15 million, or 23% year-over-year on a covenant adjusted basis. Adjusted EBITDA margin expanded to 12.2% from 9.8% a year ago. We again reduced our operating expenses, holding costs per pound flat year-over-year as we continued to exit low quality volume, and for the first time as a public company, we grew revenue per pound year-over-year, up 4 cents, or approximately 3%, driving a 4 cent improvement in operating leverage per pound year-over-year. With that context, let me walk you through the progress we've made against each of our three strategic priorities. Beginning with operational excellence are key metrics for improving consistently and those gains are holding. Compared with the fiscal third quarter of 2025, plant productivity increased by 9%, on-time delivery improved by 80 basis points, and customer complaints declined by 74 basis points. These results come from executing the same discipline practices well, consistently, and with the customer at the center of everything we do. When we run our operations consistently, service improves and cost comes out of the business. Those are the leading indicators of durable financial performance. We also made meaningful progress in exiting low-quality revenue volume, reducing our linen concentration by 6% on a year-over-year basis. We are encouraged by the progress, and we know there is meaningful room to keep raising the quality of service and revenue and our revenue per pound. Importantly, these productivity gains are beginning to flow through to lower plant operating costs and a lower cost of services. Together, our operational excellence and effective cost management reduce our cost of services on both a year-over-year and sequential basis. We also enhanced operational excellence by streamlining key corporate support functions through an outsourced service agreement with a leading third-party provider. This should make us more flexible as an organization and enhance how we support our markets and customers, improving the overall quality of our service. It reflects a new way of operating at Vestas, one designed to lower our cost structure while giving us greater capacity to innovate in how we run the business. We should begin to see the benefits of this arrangement in our fiscal fourth quarter results and more significantly as we enter fiscal 2027 and beyond. As we close out fiscal 2026, we expect to sustain this operational discipline and build on the initiatives we launched in the third quarter. Beyond plant and network execution, we are creating a more efficient and nimble operational structure, one built to better support and anticipate our customers' needs, sharpen our strategic execution, and drive future profitable growth. Turning to commercial excellence. Pricing execution was the biggest driver of our year-over-year revenue performance this quarter, and it sits at the center of the commercial disciplines we have built. Our progress starts with pricing. We continue to sharpen strategic pricing at the customer level, supported by data-driven tools designed to make our pricing and product mix decisions more profitable while we remain customer-centric. We also further strengthen customer segmentation, pricing frameworks and approval discipline across national accounts, new field sales, and direct sales. Together, these actions should ensure that the revenue we take on supports operating leverage and adjusted EBITDA. That work is now evident in our results. After several quarters of narrowing declines, revenue per pound reached flat in the second quarter and turned positive in the third, rising 4 cents or approximately 3% year-over-year. This is the first year-over-year increase in revenue per pound since Vestas became a public company, and it was driven primarily by disciplined pricing execution, reinforced by improved customer segmentation and product mix. We continue to put value ahead of volume. Pounds processed declined by 4.5% year-over-year as we intentionally exited unprofitable business, improving quality of our revenue over the same period. At the same time, we are working to restore the commercial rigor that had eroded after the spring. That means enforcing pricing discipline, setting product mix targets on new sales, onboarding volume that is recruited to our network, and exiting business that does not meet our return thresholds. The principle is straightforward. Create durable value through disciplined decisions about what we sell, how we price it, and how we serve our customers. As these practices become standard across each market center, we expect operating leverage to keep improving through higher value mix, more consistent pricing execution, and deeper penetration of our existing customer base, supported by the ongoing expansion of our market development representative program while we continue to manage our costs on behalf of our customers and our shareholders. Our top line is still developing, but it is increasingly driven by pricing executions and better customer segmentation rather than solely focused on volume. Turning to assets and network optimization. The progress we've made so far this year comes from applying one consistent set of operating and commercial disciplines across the entire business to drive operating leverage. The same playbook deployed in every market. Running that playbook everywhere has proven the model works and we have seen this proof of our financial results so far this year, specifically in operational and commercial excellence. What we have not yet achieved is uniformity across our network. The gap between our strongest and our lowest performing markets is meaningful. Many of our markets already operate at industry-leading margins, profitability and service levels, while our lowest performers continue to weigh on the overall results. Closing that gap is our single largest opportunity. The next phase of the transformation moves from applying the playbook broadly to executing it consistently but with consideration for the unique markets in which we serve, holding each market center to a more customized playbook, resulting in a higher standard designed to harmonize and optimize our assets and network. That is the work that will define our path as we exit fiscal 2026 into fiscal 2027 and its work has already begun. During the third quarter, we continued to assess and segment how our network is positioned across key markets, using our available capacity to identify growth and optimization opportunities to further strengthen operating leverage while improving route efficiency and lowering delivery costs. As we optimize the network and position bestis for growth, we will continue to evaluate asset sales where valuations present an attractive opportunity to unlock value, strengthen the balance sheet, and better align our footprint with higher growth markets. In parallel, we are evaluating our market positioning and network configuration so that we are ready to act on shifts in competitive dynamics. We are working to optimize routes while remaining particularly focused on the opportunities created by consolidation in our industry and on remaining a reliable, high-quality service partner that new and existing customers choose. As we work through the remainder of the year, I'm pleased with how we are executing our transformation. We are on track to deliver on all of our commitments for the year and today we are again increasing our full year guidance for free cash flow which Adam will discuss in more detail. A foundational part of our transformation is our culture and in particular the accountability we are building at every level of the organization. We are aligning our teams around clear performance standards and our compensation around performance based incentives that reward results. using them to drive stronger strategic execution and focus across the entire organization. On that point, our year-to-date fiscal 2026 results along with our guidance for the fourth quarter include accrued expenses for our management incentive bonus or MID program. Creating rewards-based culture was important to me as we set out our fiscal 2026 business plan and has remained paramount as we've stepped through each quarter this year. While we have historically had an MIB program, fiscal 2026 is the first fiscal year in which a management incentive bonus has been accrued for at this level since Vestas became a public company. Payments are subject to the final fiscal 2026 results and certification by our compensation committee later this year. But these accrued expenses, while in the normal course for any business, have not been normal course at Vestas until now. Bonuses must be earned every year, but establishing them in our run rate is an important step towards building a rewards-based culture. Together with surveying our teams, investing in their development, and building our Vestas, this is how we ensure that every teammate is proud to be here, equipped to perform, and rewarded for delivery. In closing, I am proud of what our team delivered this quarter. With a stronger culture as a foundation, we are running Vestas as a penny-driven business, Thank you, Jim, and good morning, everyone. Revenue for the third quarter was approximately $662 million.